In Think and Grow Rich, one of the best-selling personal finance books of all time, author Napoleon Hill identified the common characteristics that explained the success of the world’s wealthiest.
Although the book was written in the post-Depression 1930s, Hill’s lessons continue to be relevant even today. Wishing will not bring riches, says Hill. The key is to adopt tried and true principles, attentive planning, and investment best practices.
This general sentiment was reinforced recently in a bulletin from the CFA Institute, written by Robert Stammers, CFA, Director, Investor Education. Mr. Stammers submitted a compendium of Tips for avoiding the top 20 common investment mistakes. I have selected the seven that are most likely to undermine success.
1. Not having clear investment goals
Mr. Stammers deployed a well-known adage to drive home this key point: ‘If you don’t know where you are going, you will probably end up somewhere else.’ Life objectives determine not only the investment plan and the strategies adopted to meet it, but also overall portfolio design and even – in some cases – the investments selected to populate it. Investment fads are to be avoided. Long term thinking – supported by a steadfast attitude – is the recipe for ultimate success.
2. Failing to diversify enough
Although Mr. Stammers doesn’t use it, another adage supports this observation: ‘Don’t keep all your eggs in one basket.’ Establishing appropriate levels of risk and return according to different market scenarios is the basis for adequate diversification – a sometimes complex calculation that is best left to a professional advisor, working in close consultation with you. A portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any single investment.
3. Focusing on the wrong performance
Ask yourself – ‘what are my goals as an investor?’ Knee-jerk reactions to speculation or market corrections can lead to unplanned portfolio modifications. This can cause you to divert from your overall strategy and unknowingly sacrifice long-term investment success. If you’re concerned about unexpected market swings, first take some time to cut through the noise with the help of your advisor before you make a rash decision. Remember to focus on the big picture – long-term performance.
4. Paying too much in fees and commissions
It’s important to find an advisor who shares your investment philosophy and can be a trusted partner in helping you to achieve your goals. However, it’s equally important to consider the cost of your investment choices and to make these decisions with your eyes wide open. Whether it’s paying too much in advisory fees or investing in a high-cost fund, how you navigate these options can have a significant effect on your earnings over the long term.
5. Letting emotions get in the way
As a long-term investor, important life milestones will likely have an impact on portfolio management. Emotionally driven questions like ‘What will happen with my assets after I die?’ or ‘Should I involve my spouse in investment planning?’ can delay or even derail decision-making. A trusted investment advisor will be able to help you work through the immensity of these questions and construct a holistic financial plan that keeps these considerations in mind.
6. Trying to be a market timing genius
While market timing is possible, it will take more than a few lucky guesses to make this an effective strategy. Did you know that an investor who was out of the market during the top 10 trading days for the S&P 500 Index from 1993 to 2013 would have achieved a 5.4% annualized return instead of a 9.2% return by staying invested over that same 20-year period? This suggests that time spent in the market is more useful than trying to time the market.
7. Reacting to the media
To call the media noise surrounding investing and investments distracting is an understatement. The Ritcey Team spend a great deal of time selecting actionable information out of a wide range of publicly available comment and prognosis. But we also scrupulously assess its validity against Scotia Wealth Management’s proprietary research and analysis, and our own seasoned judgment. The trouble with ‘the news’ is that by the time it goes public, the information it conveys has all too often been built into market pricing.
Dave Ritcey, The Ritcey Team, Scotia Wealth Management